The existence of low balling on the Swedish audit market -A study of companies listed on the NASDAQ OMX Stockholm that voluntarily changed audit firm 2002-2010

Abstract

Background and Problem: The lack of auditor independence is discussed being one of the reasons to scandals such as Enron and HQ. A pricing strategy that has been debated impairing auditor independence is low balling. To win a new client in a tender process, audit firms supposedly offer an audit fee below cost and then increase the fee the following years to recover the initial loss. The auditors’ future financial interest in the company due to the initial loss is by some believed to impair auditor independence, which makes low balling in Sweden a relevant phenomenon to study. Aim of study: This thesis aims to explain if low balling exists on the Swedish audit market and if the size of companies affects the results of low balling. Methodology: To achieve the purpose of this thesis, a statistical study was conducted. Data, found in annual reports of companies listed on NASDAQ OMX Stockholm that changed audit firm 2002-2010, were analysed before and after the change. 107 companies that changed audit firm during the period were identified. 56 of these fulfilled our inclusion criteria; 21 companies listed on Small cap, 21 on Mid cap, and 14 on Large cap. Analysis and conclusions: This study indicates that low balling exists on NASDAQ OMX Stockholm and in Sweden. The average initial audit fee discount was -17.53%, the second year after the change the discount was -4.57%, and the fees were almost back to normal levels by the third year, -0.61%, from the estimated normal audit fee. The results correlate with the most recent research on the subject done in Sweden and Germany. Our findings suggest that the extent of low balling varies between the caps; it exists among companies listed on Small and Large cap but not on Mid cap.